IRVINE, Calif., June 29 /PRNewswire/ — Expiring tax provisions, or “sunsets,” have long been a feature of Uncle Sam’s tax code, but they usually involve relatively minor provisions. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) depart dramatically from this pattern. All tax provisions sunset by the end of 2010 – and, for many investors, parting will be such sweet sorrow.

Collectively, EGTRRA and JGTRRA reduced tax rates on ordinary income, long-term capital gains, and qualified dividends; mitigated marriage penalties; expanded the child tax credit and the child and dependent care tax credit; and phased out limitations on itemized deductions and the phase-out of personal exemptions. With the sunset of these provisions, individual income tax rates in 2011 will revert to higher, pre-2001 levels. During the presidential campaign, President Obama said that he would make the 2001 tax cuts permanent for low- and middle-income taxpayers, and that wealthy Americans would pay more. Currently, it’s expected that for individuals earning more than $200,000 or couples making more than $250,000, rates will indeed revert to pre-2001 levels.

A consortium of advisors who are representatives of and offer securities through Securities America Inc. (www.securitiesamerica.com) offer these suggestions for how investors and their advisors can adjust to a new tax landscape:

#1. Catch the early bird special. In anticipation of higher tax rates, if your portfolio includes appreciated assets, this year might be a good time to take some gains off the table at the maximum capital gains rate of 15 percent, rather than the 20 percent currently slated for 2011. Investors in the 15 percent tax bracket or lower have no gains due on appreciated assets in 2010, but will face a 10 percent tax in 2011.

“In many cases, I’m recommending investors sell appreciated assets now because they will never see capital gains rates as low in their lifetime,” says Don Patrick, CPP®, managing director of Atlanta-based Integrated Financial Group (www.Integrated-Financial-Group.com). “Investors might also consider accelerating the sale of a home or business to avoid higher tax rates down the road.” Patrick notes that unlike when investors use tax loss harvesting to book a capital loss at the end of the year, there’s no wash sale rule that precludes them from buying a security right back when they sell it and register a gain.

#2. Diversify retirement savings from a tax standpoint. Having taxable and non-taxable pots to draw from makes sense in an uncertain tax environment. The good news, says Jim Coleman (founder of Coleman Financial Advisory Group in Waterbury, Connecticut – www.ColemanAdvisoryGroup.com), is that the lifting of the $100,000 income limit for converting a traditional IRA to a Roth IRA makes diversifying possible for all taxpayers. Today, anyone–regardless of their income–can convert retirement assets from a traditional IRA to a Roth. According to Coleman, a Roth offers three major benefits: Tax-free growth that is especially attractive considering income tax rates are likely to go up in the future; tax diversification that provides flexibility in retirement income distribution planning; and no required distribution at age 70-1/2 that helps transform your retirement savings into a financial legacy.

“Obviously, converting retirement assets to a Roth would result in reportable income and trigger additional income tax – and it may be difficult to consider paying income tax on a large IRA,” Coleman notes. “However, it’s important to realize that you don’t need to convert the entire account. While investors who converted in 2010 can spread taxes due over 2011 and 2012, those in the higher tax brackets may be better off having paid all those taxes in 2010. In promoting the extra time to pay, Uncle Sam fails to mention that the top tax bracket will increase to 39.6 percent from 35 percent in 2011. Either way, if the nation is indeed entering a long period of rising income tax rates, paying a conversion tax bill may seem like a bargain in retrospect.”

#3. Use fraud losses. Because the Roth conversion is an ordinary income taxable event, taxes due can be offset by major losses due to fraud which are booked as an ordinary income loss as opposed to a capital loss, says Arthur Cooper, CFP®, managing partner of Cooper McManus, a wealth management firm located in Orange County, California (www.CooperMcmanus.com). “If you have the misfortune to take a straight fraud and theft deduction, you can convert the same amount from a traditional IRA into a Roth IRA conversion and end up with zero tax on that conversion,” says Cooper. “The strategy is a way of making lemonade out of a very sour lemon.”

Cooper notes it’s also possible to go back a few years for loss carry forwards to add to write-offs of ordinary income. “When you go back and zero-out tax liability, you save that 10-15 percent on a good chunk of the dollars,” he explains. “Plus, when you do a Roth IRA conversion, you convert taxable dollars into a future non-taxable income stream, so the effective tax savings is even more impactful than just zeroing out your tax liability.”

#4. Rethink some standard financial planning advice. While he traditionally spends time with high level executives discussing the benefits of deferring some salary, Mike Flower (partner at Financial Principles located in Fairfield, New Jersey – www.FinancialPrinciples.com) is advising high wage-earners who have the flexibility to receive ordinary income this year instead of in a later year when tax rates may be higher. “Executives might decide to exercise their non-qualified stock options,” he notes. In another departure, if future income tax rates truly skyrocket, Flower says tax qualified plans may lose some of their appeal. “You still want to contribute to your workplace plan, certainly enough to qualify for any available company match, but with the question of whether you truly will be in a lower tax bracket in retirement, you might also consider funding accounts outside the tax-deferred arena for some diversity,” he explains. “If your company’s retirement plan offers a Roth option, you might consider that so you have a pool of money to pull from in retirement where you will not owe taxes on distributions.”

Finally, while financial advisors traditionally encourage clients to make charitable contributions before the end of year, Flower says if you are considering a substantial charitable donation, you might be better off from a tax standpoint to spread it out or defer it to the future to gain a greater tax deduction.

#5. Understand your father’s dividends will cost you more. Currently, the maximum tax rate on qualified dividends is 15 percent, but that will revert to regular income tax rates in 2011. “Although President Obama has proposed a tax of 20 percent for both capital gains and dividends in 2011, if the reclassification of dividends lapses at the end of 2010, next year the top dividend rate could revert to 39.6 percent. Still others talk about a tripling of the current 15 percent rate,” explains Clyde Wyatt, CLU, CFS, a director at Dallas-based Navigation Financial (www.NavigationFinancial.com). “Whatever happens, the increase in tax on qualified dividends obviously makes dividend paying stocks less attractive in a retirement income stream.”

In addition, starting in 2013, the Healthcare and Education Reconciliation Act of 2010 will levy a new 3.8 percent Medicare tax on investment income for individuals earning more than $200,000 or couples earning $250,000. Notably, the 3.8 percent surtax does not apply to distributions from IRAs and other qualified retirement plans like 401(k)s, 403(b)s and 457 plans, or Roth IRAs.

Continues Wyatt, “Because income from tax exempt and tax deferred vehicles like municipal bonds, tax deferred non-qualified annuities, life insurance, and non-qualified deferred compensation do not count as investment income, investments in these vehicles should become more favorable relative to investments producing income subject to the tax.”

The net effect of the capital gain tax increase and Medicare tax will be a 23.8 percent tax rate for higher earners–the highest rate for long-term capital gains since 1997, says John Jenkins, AEP®, EA, CFP®, president and CEO of San Diego-based Asset Preservation Strategies (www.Asset-Preservation.com). “Once these higher rates kick in, high wage-earners may try to defer income in an effort to stay below the highest tax thresholds. We’ll also be considering some advanced planning strategies to offset tax liability through the use of Section 42 tax credits (low income housing tax credits) and also oil and gas investments.”

In Jenkins’ view, it’s ironic that the economic impact of these tax increases will be felt by the very investors who could help promote long-term economic growth. “In 2007, taxpayers with incomes greater than $200,000 reported 47 percent of all interest income, 60 percent of all dividends and 84 percent of all capital gains,” he notes. “And the Joint Committee on Taxation estimates the new Medicare tax on investments will cost high-earning taxpayers an additional $30 billion annually. Further, because the modified adjusted gross income threshold at which this Medicare tax will apply will not be indexed for inflation, going forward an increasing number of taxpayers will be snared by this tax provision.”

Bottom line? The tax code is in a state of flux. In addition to these changes, the federal estate tax has already expired. If Congress doesn’t act, estate taxes will be reinstated in 2011 at a rate of 55 percent for estates valued at more than $1 million. While portfolios have to be re-examined in light of this change and the anticipated sunsets, planning can be done only on the basis of educated assumptions. Accordingly, it’s important to stay in close touch with your financial advisor so you can prepare for major changes and take advantage of any emerging opportunities.

Click to view a table that compares what income tax will look like in 2011 (after the sunset at end of 2010) with what the tax picture is today and could remain if we see a permanent extension of the 2001 and 2003: http://www.taxpolicycenter.org/taxtopics/2011_continue_2001cuts.cfm

Web site: www.coopermcmanus.com

Source: Cooper McManus

Genworth Financial, Inc has introduced a new product, Total Living Coverage® Annuity, that will help customers achieve financial security and independence. TLCA links the safety and tax-deferred growth of a single premium non-qualified deferred annuity with a long term insurance rider to provide long-term care benefits. Additionally, claim payments for long-term care expenses are tax-free.

According to Genworth Financial, the advantages include:

• Dependable and stable growth
• Protection in the event of a long term care need with guaranteed
• renewable long term care insurance
• Simplified underwriting process
• Optional inflation protection
• Waiver of monthly long term care charge provision

TLCA would be a good option for individuals who are near retirement and have assets they want to protect, foresee the potential need for long-term, and have a large amount of investable assets ($200,000 or more).

“With Total Living Coverage Annuity, consumers use their annuity value to purchase long term care insurance coverage up to three times the amount of their single premium, creating a pool of benefit dollars for long term care expenses paid first from the annuity value and then from the remaining pool,“ said Buck Stinson, President of Genworth’s U.S. Life Insurance Products

American’s today are bogged down with more than just their everyday finances; they are also bogged down with paperwork that accompanies these financial contracts. According to a survey conducted by Consumer Reports, “nearly one-quarter had either lost or forgotten about critical paperwork.” This trend is costing many Americans money, 16 percent had lost money or incurred a charge because of the poor organization of their paperwork.

Below is a list released by Consumer Reports outlining what documents you should keep and for how long.

Documents that you have no long-term need to keep include:

• –  Bank records. Keep deposit and ATM receipts until you reconcile them

with your monthly statements.

• Credit card bills. You don’t need to keep them after you’ve paid them

unless they support a deduction you’ll be taking on your taxes, such

as for a charitable donation (in which case you should file the bill

with your current-year tax records). If an item you’ve charged is

under warranty, keep the bill until the warranty expires.

• Investment statements. You can shred your monthly and quarterly

statements from brokerage, 401(k), IRA, Keogh, and other investment

accounts as new ones arrive. But hold on to annual statements until

you sell the investments.

What to keep for a longer period:

Documents relating to investment purchases, loans, and other items that expire can be stored in an out-of the way file cabinet. But try to go through them once a year and toss out papers below including:

• Household furnishings paperwork. Keep receipts, warranties, and

instruction booklets for major appliances and electronics.

• Loan documents. Keep closing documents for mortgage, vehicle, student,

and other loans in a safe-deposit box. You can get rid of them after

the loan is paid off.

• Savings bonds. Hold these in a secure place until you cash them in. Or

you can convert them to electronic form using the Treasury’s

SmartExchange program, at www.treasurydirect.gov.

What to never toss:

Hold on to essential records such as birth or death certificates, marriage licenses, and divorce decrees. Social Security cards and military discharge papers should be kept in a safe-deposit box. Other documents to hold on to forever:

• Defined-benefit pension documents. Keep pension-plan documents from

your current and former employers. Store them in your file cabinet.

• Estate planning documents. Keep copies of wills, trusts, and powers of

attorney in your safe-deposit box. You should also make sure your

attorney and your executor have copies.

• Life insurance policies. For permanent life insurance — policies that

have a cash value or investment component — keep documents and a list

of the companies that issued them and their phone numbers in your

safe-deposit box.

http://www.consumerreports.org

~ Tax season is the perfect time to organize your records.

It’s 2010 at last, and that means that the long-anticipated federal estate tax repeal is upon us.  You read it right: if you die in 2010, your estate will not be taxed.

How long has the repeal been anticipated?  The 2001 Tax Act provided estate tax legislation for the years 2002–2009, followed by a year without.  In 2011, the estate tax is to return with the same exemption and rate that it held in 2001, a higher rate than during the span 2002–2009.

A year free of estate tax is not to everyone’s liking, however: the House of Representatives voted 225-200 (a 52.9% majority) in favor of extending the estate tax policy of 2009 into 2010.  The House’s decision was not reached until last month, however, and the Senate adjourned without ever addressing the bill, so the action was never carried.

Picking up where the Senate dropped the ball is President Barack Obama, calling again for an extension of the 2009 estate tax into 2010.  Some invigilators (including moneywatch.com and Mayer Brown) address the likelihood that our federal overseers will install the 2010 estate tax and furthermore make it retroactive to 1 January, which will surely prove an irritatant to those who suffer bereavements in the interim—not to mention violate the ex post facto prohibition of the U.S. Constitution, Article 1 §9.  (After all, the constitutional prohibition has not always prevented ex post facto legislation in the past.  Wikipedia points to the Adam Walsh Child Protection and Safety Act of 2006 for an example.)

Is it likely that the estate tax will be back later this year?  With both the House and the President behind it, it ought to be.  With an ever-accelerating federal deficit, our administrators are hardly to be expected to pass up on the $25 billion per year that estate tax brings in.  Moreover, the estate tax falls well with the current administration’s affinity for taking from the unpopular rich in order to win voter support from the majority (consider the 90% bonus tax bill passed by the House last year for another example).

In 2009, the estate tax exemption stood at $3.5 million, with a tax rate of 45% for every cent after that.